Knowing your gross income versus your net income is important when you?re applying for a mortgage or any other type of loan.
For most people, gross income is typically your income before all the deductions, such as federal, state and local income taxes, social security, disability and retirement plan contributions. Your net income is usually the result of subtracting those deductions.
If you?re self-employed and don?t get a regular pay check, the question of gross and net income gets a little more complicated.
Some say lenders generally consider the amount of money you pay taxes on is your gross income. If that number is low because you?re depreciating the cost of equipment, some say the cost of that year?s depreciation can be added back in to calculate your annual gross income for the purposes of applying for a loan.
If you?re taking a deduction for part of your home as a business use, you can add that back in to figure your annual gross income, as well as any deduction for using your car for business.
Some credit consultants suggest that the self-employed should average two years of income. The downside is if you had less income in the most recent year. Lenders hate to see declining income and will want to know why.
Getting a loan when you?re self-employed can be difficult, as lenders regard self-employed people as being more risky. The self-employed may have to pay a higher interest rate or may have to shop longer and harder to find a lender. Sometimes having an incredibly high credit score can offset the negatives of being self-employed.